From 1 January 2025, significant changes to Australia’s Foreign Resident Capital Gains Withholding Regime applied to all real property transactions—regardless of value—with an increased withholding rate of 15 per cent. These changes affect contracts entered into from this date, explains Attwood Marshall Lawyers’ Property & Commercial Senior Associate, Mieke Elzer.
What is the Foreign Resident Capital Gains Withholding Regime (FRCGW)?
Introduced in 2016, the FRCGW regime ensures foreign residents meet their capital gains tax (CGT) obligations when selling Australian property. Buyers must withhold part of the purchase price at settlement and remit it to the ATO when acquiring property from foreign sellers.
In 2017, the withholding rate increased from 10 per cent to 12.5 per cent, and the value threshold was lowered from $2 million to $750,000.
Since 1 January 2025, the threshold has been removed entirely, and the withholding rate is 15 per cent. These rules apply to all contracts entered from this date, regardless of property value.
The regime also applies to option transactions. If the option grantor is a foreign resident, the buyer must withhold 15 per cent of the option fee and remit it to the ATO.
What this means for sellers
Australian Tax Residents: Sellers can avoid the withholding requirement by providing a clearance certificate from the ATO before settlement. This certificate confirms that they are not foreign residents.
Foreign Tax Residents: They cannot obtain a clearance certificate but may apply for a variation to reduce the withholding rate, particularly if the sale will result in a loss.
Buyer obligations
If the seller fails to provide a clearance certificate, buyers must withhold 15 per cent of the sale price and send it to the ATO. Failure to do so may result in penalties and interest charges.
Determining residency
Residency for tax purposes differs from immigration or citizenship status. The ATO uses four tests:
- Ordinary Concepts Test: Evaluates whether a person lives in Australia based on lifestyle and ties (e.g., Addy case).
- Domicile Test: A person with a domicile in Australia is a resident unless their permanent place of abode is overseas (e.g., Subrahmanyam case).
- 183-Day Test: A person in Australia for 183+ days in a tax year is presumed a resident unless their usual abode is elsewhere (e.g., Pike case).
- Superannuation Test: Applies to certain public servants and their families.
Satisfying any one of these is enough to establish tax residency.
What real estate agents need to do
- Ensure sellers apply for a clearance certificate early: Without it, buyers must withhold 15 per cent at settlement. Clearance certificates are free, valid for 12 months, and may take up to 28 days to process.
- Advise foreign residents to seek tax advice: Foreign residents may be eligible for a variation. The outcome could influence the price they’re willing to accept, particularly if they need the sale proceeds to fund another purchase.
Tips for agents
- Confirm tax residency early: Identify whether the seller is an Australian tax resident as early as possible.
- Collaborate with experts: Work closely with conveyancers, lawyers, and accountants to prevent complications.
- Allow for processing time: Settlement should be at least 28 days if a clearance certificate hasn’t been annexed to the contract. If applying for a variation, allow at least 42 days.
- Educate buyers: Ensure buyers understand they’re legally obligated to withhold funds if no clearance certificate is provided.
Case Study 1: Delays from late clearance certificate applications
Emma and Jack, Australian tax residents, sold their home on 3 February 2025 with a simultaneous settlement for their next purchase on 3 March. They applied for clearance certificates on 18 February. Emma’s certificate arrived in time, but Jack’s did not.
The buyer, looking to exit the deal, issued a Notice to Complete. When Jack’s certificate still hadn’t arrived by the deadline, the buyer withheld 15% of Jack’s share and remitted it to the ATO.
As a result, Emma and Jack lacked enough funds to complete their purchase and had to borrow the shortfall from family to avoid breaching their purchase contract. Had they applied for clearance certificates earlier, the issue could have been avoided.
Lesson: Apply for clearance certificates as soon as a sale is contemplated to avoid costly delays and legal risks.
Case Study 2: Clearance vs. Variation Certificate
Penny, an Australian citizen, returned from the US after decades abroad and bought a home, intending to stay. Following an accident, she was forced to sell quickly.
Although she may have met residency requirements, her accountant advised applying for a variation certificate instead due to uncertainty about her future and ongoing foreign investment income.
The sale resulted in a capital loss, and the withholding rate was reduced to zero. Penny avoided unnecessary tax implications and didn’t need to declare her overseas income in Australia.
Lesson: Residency status isn’t always clear-cut. When in doubt, professional advice is crucial.
Final Thoughts
With the $750,000 threshold now removed, all property transactions fall under the FRCGW regime.
Real estate agents play a vital role in facilitating compliance and should:
- Proactively advise sellers on the need for clearance certificates
- Help buyers understand their withholding obligations
- Plan for sufficient settlement time
- Collaborate with legal and tax professionals
Understanding these rules enhances your value as a real estate professional and helps prevent costly delays or legal issues.
For more information, refer to the ATO website or consult the Taxation Administration Act 1953.
Attwood Marshall Lawyers – your local property law experts
Attwood Marshall Lawyers have lawyers specialising in both Queensland and NSW property transactions. Our lawyers have in-depth knowledge of Tax Residency laws for Sellers, as well as Buyer obligations under the FRCGW Regime.
As a PEXA-certified law firm, we ensure settlements proceed smoothly and happen on time, without any surprises.
Our offices are located at Coolangatta, Kingscliff, Robina Town Centre, Southport, Brisbane, Sydney, and Melbourne. Our lawyers can meet with you at a location most convenient.
Additionally, our Robina Town Centre office is open Thursday night until 9 pm and Saturday morning until 12 noon if you need to make an appointment outside of regular business hours.
To get professional and prompt legal advice, please contact our Property and Commercial Law Department Manager Taylah Lein on direct line 07 5506 8208, email tlein@attwoodmarshall.com.au or call our 24/7 phone line on 1800 621 071.
